HIGHLIGHTS-Bank of England's FPC tightens home loan rules

LONDON, June 26 Thu Jun 26, 2014 6:47am EDT

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LONDON, June 26 (Reuters) - The Bank of England sought to slam the brakes on Britain's surging housing market on Thursday by announcing a cap on home loans and tougher checks on whether borrowers can repay their mortgages.

Following are the highlights of press conference given by the bank's Financial Policy Committee, headed by BoE governor Mark Carney:

CARNEY ON WHAT MEASURES WILL ACHIEVE

"(These measures) will prevent lending getting too far ahead of income growth and they'll prevent a slide into riskier lending and higher indebtedness that could undermine the economic expansion over the medium term."

"These actions will bite if there is sustained momentum in the housing market over the coming years and that's accompanied by further sharp increases in high loan to income lending."

"The shift from responsible lending that we're seeing today ... into reckless, widespread high loan to income, high loan to value, riskier lending tomorrow ... that can't happen because there's a cap.

(This would) limit the amount of high loan to income lending that can take place across the country and by extension in London."

"The legacy of high indebtedness and structural imbalances mean there are financial stability risks that if left unchecked could undermine the durability of that expansion. And the biggest risks relate to the housing market."

"These actions don't affect the central outlook for the economy, in fact they make it more likely to happen."

CARNEY, ASKED ABOUT PROJECTED INCREASES IN MORTGAGE DEBT

"You rightly use the word "tolerate", I wouldn't use the word happy. This is the limits of our tolerance and that's why there is a cap in place. We will evaluate (and) if we need to recalibrate, we will."

"We could adjust it (the cap), we definitely could adjust it ... there's other tools that we could put in place if necessary."

"We have a broad range of additional tools that we could use. Obviously what we're announcing today, one could change the calibration of that if that were appropriate."

"We could activate a sectoral capital buffer. In other words we could ask banks and building societies to hold more capital against mortgage lending and we could do that for reasons of the macroeconomic risk as much as reasons of the risk to the banks' balance sheets."

CARNEY ON IMPLICATIONS FOR MONETARY POLICY

"They're (today's actions) less likely to have implications for the path of monetary policy, which currently anticipates limited and gradual rate rises over the forecast horizon."

"Monetary policy does not need to be diverted to address a sector specific risk in the housing market."

CARNEY ON WAGE GROWTH EXPECTATIONS

"Wage growth is important to all aspects of our forecasts. It is central to the MPC's forecast.

Some of the house price recovery we would think is the product of expectations of future wage growth. So if that wage growth doesn't come through, some of the recovery is less sustainable on top of that, the cap would bite more quickly and it would (have) consequences for prices."

CARNEY ON WHETHER MONETARY POLICY COULD BE USED TO ADDRESS FINANCIAL STABILITY RISKS

"It's sensible to be fully informed by the stress test before we would consider doing something like that, it's also sensible to use other targeted tools like this before we consider doing that.

We could also activate more broadly, not just a sectoral capital add-on for housing, the capital conservation buffer that was referenced earlier, which we are setting at zero ... we could just that for macroeconomic purposes.

And ultimately yes, we can use monetary policy to address financial stability risk."

"You have to consider how much one would have to move monetary policy in order to influence a sectoral financial stability risk, how much longer it would potentially take to get back to target, and whether that's a sensible strategy given that you are affecting the entire economy to address a risk in a sector, albeit one as important as housing, but a sector for which you have a wide range of tools and a committee that is mandated to address exactly these types of risk."

CARNEY ON GOVERNMENT'S HELP TO BUY SCHEME

"The FPC welcomes the Chancellor's announcement today that no new loan at or above four and half times borrower's income can be included in the Help To Buy mortgage guarantee scheme."

CARNEY ON HOUSE PRICES

"It is not the FPC's role to control house prices nor can it adjust underlying structural issues related to the supply of homes."

"What we see based on current forward indicators is we expect momentum in the housing market to continue for the next year or so."

CARNEY ON THREATS TO FINANCIAL STABILITY

"The FPC does not believe that household indebtedness poses an imminent threat to stability, underwriting standards are more responsible than they were in the past.

However, we have seen time and time again how quickly responsible can turn into reckless, creating risk that ultimately could derail the UK economy.

The FPC is concerned that the marked loosening in underwriting standards and an associated significant increase in highly indebted households could pose major, direct and indirect risks in the future."

BOE DEPUTY GOVERNOR ANDREW BAILEY ON ENFORCING CAP

"Now you will know if you look at legislation that we have enforcement powers available through us, on the whole (as) prudential regulators we don't use enforcement powers in the front of our responses. But they are there.

They are full enforcement powers and they are legal powers. That would be in our tool kit, we have a range of enforcement powers you can use which are to do with penalties and they can include restrictions on business.

But as I say, as a prudential regulator, that's not my first line of attack. Frankly I expect institutions to respond appropriately to this."

(Editing by Catherine Evans)

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